A taxing situation

For almost all of last year — from the inauguration of President Joe Biden in January to the collapse of his signature economic legislation in December — financial advisers and their clients were bracing for tax increases.

Some investors got so amped up about potential tax reform that they made changes in their portfolios and estate plans anticipating what Congress might do. Then Congress did nothing, leaving them regretting their haste.

A few weeks before this year’s tax filing deadline, the tax code is essentially status quo. But that doesn’t mean tax planning is stagnant despite the demise in the Senate of the nearly $2 trillion Build Back Better bill that incorporated the Biden administration’s spending and tax agenda.

Although it doesn’t look as if Democrats will be able to revive the whole package, parts of it could pass. The spending initiatives that reemerge likely will be paid for by increasing taxes on the wealthy. In addition, if any part of Build Back Better starts moving again, it could include a provision to raise the deduction cap on state and local taxes.

Even if the stake in the heart of Build Back Better remains in place, major tax changes are looming in a couple of years thanks to the sunsetting of provisions in the 2017 Tax Cuts and Jobs Act. For instance, the estate tax exemption for individuals of approximately $12 million will fall to about $6 million, and individual tax rates will return to their higher previous levels in 2026.

On top of last year’s commotion over tax policy, the uncertainty about whether higher taxes will gain traction in Congress this year and the phasing out of the 2017 tax cuts, there’s also the current economic environment. Market volatility, inflation and pending interest-rate increases are affecting potential tax burdens.  

These elements have combined to make taxes integral to financial planning and investment management, and given advisers an opportunity to deepen client relationships.

“Talking about tax planning doesn’t need Build Back Better,” said Leslie Geller, wealth strategist at Capital Group. “We’ve had this shift to making it part of the day-to-day planning conversation between advisers and investors.”

Every tax planning discussion is different for each client and could open new vistas. For instance, it can encompass a client’s small business, estate planning, gifting strategy and an assessment of the tax policies in the states where they live.

“It’s these situation-specific, client-specific conversations that we’re encouraging advisers to use to [start] tax planning conversations,” Geller said. “Tax planning becomes a way to enrich the client-adviser relationship. It naturally brings you into the areas of the client’s life beyond investments.”


The fact that substantial tax increases on the wealthy didn’t come to fruition in 2021 gave advisers and clients some breathing room without diminishing the importance of talking taxes.

“We dodged the bullet last year, but that doesn’t mean the tax rates became zero,” said Rob Kuharic, director of tax managed solutions at Russell Investments. “This is the opportunity to use that wake-up call. The time to do tax planning is now. It’s pretty easy to start the conversation. The tax subject is alive and well. People’s minds are open and they’re listening.”

Financial advisers often need to work with other professionals, such as CPAs and estate attorneys, to customize tax planning advice.

“We spend a lot of time [forming] their strategy alongside their tax adviser,” said Sylvia Guinan, a financial adviser at Wells Fargo Advisors.

In her role, Guinan brings to the group an understanding of the client’s “heart and mind goals.” She works with the other members of the tax planning team to incorporate them in the overall strategy.

“We want to make sure we’re first and foremost taking care of our clients,” Guinan said. “We try to create a good rapport and keep open lines of communication. If we’re working as a team, we can bring value to our clients and the next generation.”

The adviser has to be the catalyst for the tax discussion, said Tim Speiss, a partner and personal wealth adviser at EisnerAmper.

“You cannot wait for the client to initiate the discussion or schedule the meeting,” he said.

The tax planning team can decide who’s the quarterback.

“You’ve got to go with a common voice,” Speiss said. “There’s no ego here. If they’re all working together, that’s a powerful advocacy team for the client.”

Those discussions could start with the current economic environment. For instance, market volatility is creating opportunities for tax-loss harvesting, several advisers said.

Or the talks might start with a look back to last year, said Garrett Reeg, a senior adviser at Moneta. The worst didn’t happen in terms of tax increases and other reforms targeting the wealthy. They’re gone but not forgotten.

“How can you start planning proactively?” Reeg said.

Some people are taking stock of what Build Back Better shot at and missed. For instance, the House version of the bill placed limitations on conversions of traditional individual retirement accounts to Roth IRAs for high-earners. It would have prohibited so-called back-door Roth conversions for all income levels.

“Tax planning is one of the few things … you have control over.”

Leslie Geller, wealth strategist, Capital Group

With a green light for moving funds from traditional IRAs, where contributions are tax-deferred, to Roth IRAs, where contributions are made with after-tax money but earnings grow tax-free, Joanne Burke’s clients are hitting the gas.

“The sentiment is go for it and get those Roth conversions … until legislation dictates otherwise,” said Burke, owner of Birch Street Financial Advisors. “Take advantage of this opportunity before they close the door on a back-door Roth.”

Reeg has noticed increased interest in Roths that began at the end of last year and has continued into this year. 

“People have been accelerating these Roth conversions or rollovers if they think they could be prohibited in the future,” he said.

The House version of the Build Back Better bill also would have reduced the estate tax exemption by half for individuals as of this year, moving up the timeline from the 2026 reset under the 2017 law.


The close call “got people’s attention,” said Tim Steffen, director of tax planning at Robert W. Baird & Co. “There’s a big opportunity on the estate tax planning side that might not be there in a few years. [Clients] may be willing to jump on this right away.”

The renewed interest in estate planning is coming with a focus on the basics, Geller said. The idea is to make gifts as soon as possible and do so in a way that is tax smart and doesn’t affect the estate exemption.

For instance, she recommends that grandparents help grandchildren with educational expenses by writing tuition checks directly to colleges.

“There’s a return to recognition of simple gifting techniques,” Geller said.

Doing gifting early in the year also could take advantage of market volatility that has knocked down the price of many stocks.

“You could consider accelerating gifts at lower valuations with the hope of getting future growth of these assets out of the estate,” Reeg said.

Some estate planning strategies are in vogue because of the low interest rates that exist for now.

Speiss recommends to many clients that they sell assets to a trust for the benefit of a family member rather than making a gift. The funds that are transferred to the trust must be paid back at applicable federal rates that are currently about 60 basis points.

The growth on the assets, however, accrues to the trust beneficiaries. That growth could easily eclipse 60 basis points as the Fed raises interest rates.

“The urgency to do this is because we’re in a rising interest-rate environment,” Speiss said.

The prospect of higher interest rates also is causing advisers to recommend grantor retained annuity trusts. Under a GRAT, assets are placed in a trust, and an annuity is paid out annually. At the end of the GRAT’s life, the beneficiary receives the assets tax-free.

“GRATs are still in play with the anticipation of higher interest rates,” Burke said.

With the estate tax exemption set to fall precipitously sooner or later, another strategy for high-net-worth clients to use is a spousal lifetime access trust. Under a SLAT, one spouse transfers assets to a trust that is controlled by the other spouse. That removes the funds from the joint estate but still allows the gifting spouse to have access to the funds, assuming the couple doesn’t get divorced.

Over the last few years, estate planning has drifted away from tax planning because the exemption was so large under the 2017 bill, Steffen said. But with that bill sunsetting, a much smaller exemption creates planning challenges and opportunities.

“Advisers need to be prepared to have that conversation with their clients,” he said.

At a time when volatility pervades financial markets, it’s impossible to predict how investments will perform. By comparison, tax strategies can be a haven of certainty.

“Tax planning is one of the few things in this realm you have control over,” Geller said.

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Andrew is half-human, half-gamer. He’s also a science fiction author writing for BleeBot.

Andrew Vincent
Andrew is half-human, half-gamer. He's also a science fiction author writing for BleeBot.
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